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tv   Options Action  CNBC  May 20, 2012 6:00am-6:30am EDT

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money, and it is this. people first, then money, then things. happy mommy's day, everybody. see you soon! ja this is this is "options action," your front row seat to smart money. tonight, face-off. fear off, dan nathan has an options trade on rival google that can quadruple your money in just a month. he'll explain. plus, talk about breaking the bank, how would you like to buy wells fargo for just under a buck? no, that's not a misprint. it's just cole and carter's whale of a trade on wl nbc. why are all those trades on the darden calls?
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scott nations with it. "options action" starts now. the largest equities option exchange, i'm brian sullivan in for melissa lee tonight. we'll be all over facebook in a second. but while you're watching the biggest ipo technology of all time, a curious thing happened to the overall market. it sank, and it's now posted its worst week of the year. is it a danger zone to stay away from, or is it a huge buying opportunity? let's get in the money and find out. and dan nathan, what has you the most scared or most opportunistic about the math? >> what would make me nervous is the selloff has been very orderly in the last few weeks. in other words, we haven't seen panic situations. it leads me to believe the smart money, the fast money, the hedge funds are well hedged, and then we're waiting to see what some
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of the dumber money is doing. i'll call it. the mutual money. they're going to be the ones selling it on the first down 2.5%, 3% day. >> most of the comment i got this morning is that the market was oversold going into today. >> correct. >> and it looked ripe for a bounce. why did we not get that. >> wait a minute. you've got $100 billion stock. everybody's got their eyes on that. wi even about got a $100 trillion problem. all right? while everybody is focusing on facebo facebook, with maybe we should pay attention to what's going on on the other side of the pond. is that a good sign? >> if you're a home buyer it is. >> phenomenal. who's got money for that? in the meantime, that's great point. if banks were actually making loans into small businesses and sitting there saying we're going to buy $100 billion worth of grabby control, and that's how we're dwoung to be making money, that is actually what people are concerned about.
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can banks continue to make money the same way they're doing it and now there's some question as to whether you're going to see regulatory scrutiny on it and what's happening in europe. >> you know, brian -- >> your contacts are these big money guys. they need everybody to buy things all the time. when you look at what's going on -- i'm sure you have other contacts. >> all of them at the bottom of the ranges. technically we obviously did not get sniet well, we didn't get it here, but we're seeing some things overseas, seeing things in the currency markets. the dax is the only thing up on the european year. things are imploding all over the world and we spent the last two weeks talking about the facebook. >> scott, let's talk about facebook. they say no man is an island, but is facebook an island? in other words, was it its own thing? important but isolated. and on the other side, to mike's point, you've about got greece, you've got g-8 this weekend, jpmorgan. are those things outweighing
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even the hoopla over facebook? >> it's tough to say that anybody who has anything to do with facebook is unlucky today, but to a certain degree they are because as we've been talking about, the market has just been sick for the entire month of may. if the market, overall, had been frothy, who knows what would have happened. facebook is just a symptom. link linkedin and groupon going well today. people buying into the puts, buying calls in the vix, it's tough to see how anybody would get very excited about facebook, at least past today. >> we kneed that name, didn't we? we needed to get the retail investor back involved, back interested in the market interest the data so far we've gotten. they're sending our team some stuff. it looked like the retail investor did get back into the market. call me old people. call me old school, but i thought stocks went up when there were more more buyers than
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sellers. >> hey, listen, dude. when you start hearing things like this was ten ten times oversubscribed -- >> it's a disaster of a deep. listen, this thing is probably going lower. i think we should stop talking about it. i tlirng's going to be more indicative for what the future is for the markets over the next few months. how is that? >> well said, and i like the dude comment because i will abide the rest of the way. let's go bowling. >> all right. let's get now to tell fanlt in the room. facebook. the most anticipated tech ipo since google was barely able to eek out even a slight gain today. the price action considered by many to be a slap in the face would have expected big gains. the performance also stands in context to other recent contacts, ipo e os. i would argue dan -- and many consider this a failure, a
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fizzle, a flop. this is a perfect ipo. it should not have such a low float and private equity offering that it should have a huge spike and convince the market and the investors that it was all rigged for the "insider"s. it ended where it began. can we view this as a success in. >> i think we can. listen. there was so much hype. when you think about the valuation, it doesn't work for a lot of people. i think for the end of the day, it's just fine. i don't think it's a disaster. i don't thing it's a huge home run. but i think it's fine for the investors. they can take a look and the company is going to have to rest on its own merits. we're going to start comparing this to some real companies like google. >> was it more, mike, of a disaster for maybe where we are, not knocking the nasdaq necessarily because they got the listing and it ooh going to be a big win for them to come. but when i hear that trades are put in when executed at 11:30 and you did not get a confirmation of where your rate was until 2:00 or later, if you got it at all, if you're on a
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big desk, you're going to sit back. can we view this as maybe a market issue today? >> there was a market issue for sure and that did probably affect how the stock traded. maybe they should have contacted bats about this. they would have obviously known how not to do it. here's the thing. would that mean you could sit here and bid thinking grout your selloff at $41.5. were you a buyer at $39? i don't know how many people decide they'd weren't going to be in there to support it. >> i want to get to dan and google in a minute. first i want to ask you, the whole kerfuffle, all the under wri writers came in. do you believe that. >> do you believe en masse the banks came in and said throw whatever you've got eight, don't let it go below $38? >> i think the banks certainly have an interest in keeping it above the ipo price.
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i actually think your point before, that it was a fair ipo or well done is fairly important. compare this to groupon with this tiny, tiny float that it's converted the market in groupon and groupon options. groupon is in a crazy situation right now still because of the tiny float. i think what facebook did is they looked at facebook and said they don't want to do that. >> flattery will get you nowhere. >> listen, i'm going to lay this out really simply. this is a trade i'm lookinging at. i posted it on my site at 2:00 this afternoon. it dropped at the 3:00 selloff. you may want to wait for a bounce and you may want tow wait until july options are listed but one of trades i think is interesting, in about 40 days you're going to have all of the underwriters and they're going to come out and initiate research coverage. you're going to see the issue
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gets pounded in. monetization of mobile search it's problem for google and facebook going forward. it's about a third as profitable. technically when i look at google it looked like they were selling going toll buy facebook throughout the day. i was -- just a couple of hours ago the stock dropped 3% but you may want to wait for a bounce. i was thinking about a short term, short structure in google, a put spread. >> okay. a poot spread. dan's using what's called a put spread. those new to the show or new to trading, it's a fairly common option strategy, but it's always good to crack open a play book. this is a bear strategy where you buy one put and reduce the cost by selling the lower strike put of the same inspiration against it. the goal is simple. you want the stock to fall to the low put strike. that is where you make the most money. that is also, though, where your profits are kept.
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so. >> so i'm looking at june. google has underperformed the market all year long. i'm going to isolate the previous low in january. rarely what i wanted to do with the stock, by the tune of 550, 600. 506 is my max risk, okay. my max gain is 1,950. so i bought one of the june 585 puts for 14 bucks, sold one of the june at 7506789 between 579.5 and 560, i can make up to 1950. below 560 i make three and a half times my money. and losses, max/loss. >> you know, there are things about this trade i like, and there are things about this trade i don't like. the first thing i think is really challenging is that while the whole tape looks weak, going sl actually fundamentally a relatively cheap stock and
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that's one of the things i think could be a backstop here. if you're going to make a bearish bet, there are a couple of things. the price options is relatively high. skew is relatively high. this is not a leveraged company. >> you can't just throw out it's a cheap stock. >> why do you say it's cheap. >> defend that. why do you say it's cheap? >> mobile is harder to monetize. >> the ads are fewer. the adds are fewer. they have google wallet. they've got droid. they're making money and a lot of it. do you care about a company that's trading at a 12 times free cash flow? i do. even if they spend half of it -- >> you just made a good point. i think they're going to spend half of it on twitter and think the investment community at first may not take this so kindly. they need to catch up in social media. i think the facebook thing
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highlights that. twitter is blowing up right now and they're serving as a big competitor to google. i think you can see it at $25 billion and i don't think it's going to be investor-friendly. >> terrific. so i'll buy another company at 25 times the revs rchl you kidding me? >> you can goinget it all you want, but there's only one place to find stocks versus options. right here, son. do you want to short google? well, you eat better get a lot of cash on happened. shorting stocks, remember this, carries unlimited risk. right? stocks can theoretically i go to infinity on the upside. dan's put spread defines it at just $650 and offers a potential of a 4-to-1 payout like bodiemeister. all right. moving on to the other big story of the day, the week, the month, and depending on where it goes, the year. that is jpmorgan. you have a lot more coming out
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on this story. the stock getting hammered today. shares of the bank basically negative on the year. cnbc's mary thompson is all over the story from the beginning and she's back there. >> hey, there, brian. a jpmorgan spokesman declined to comment on what he called guesses. derivatives expert says given jpmorg jpmorgan's the only one that seeing its book it's really the only one that ultimately know. they said last week the $2 billion in trading losses could grow by a billion dollars or a billion more. risky trades some fear with similar losses lurking somewhere on their books. but citi's liquidity pool has primarily invested in cash or government-backed securities and
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morgan stanley's ceo telling them at the firm's annual meeting it runs its own risk profile and doesn't take big-bet positions or big positions like jp morgan did under improvement and corporate credit offseth an earlier hedge that protected it from a credit bet. back to you. the troubles at jpm is contributing to problems at another bank. >> we're talking about wells fargo. we've got several charts. let's jump right in. this is a two of-year chart. you usually respond to the prior top because the people from here, unhappy people, sell, having lost money. they got their money back. as long as you hold trend, which it did, this is a perfectly normal reaction. so the first thing is it's outperforming other financiafin doing better.
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take a look at this. five-year chart. 35, 35, 35. after you do it for the third time, typically you've removed as much of the supply as you need to. this is a pretty good setup for what should be an important breakout. i want yo tow look at long-term charts. this is citigroup versus earnings over the last 20 years. share price gets way ahead and falls back. next one, take a look at jpmorgan. share price versus earnings. basically trendless, going nowhere. now look at wells. this is a much different story. consistently improving earnings street. this is the best in breed. it acts better than other banks right now. we think you go for it right here. >> carter, thank you very much. your trade. >> let's take look at this. 80% kochcome from the u.s. they're actually in the business that probably congress wants banks to be in in, trading at 2.5, ten times the earnings. the way to protect yourself, i
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look at the stock and i can see it actually hitting 30 before it rallies back up. it's simply by a kauchlt you can make a bullish bet. i'm looking at the july 33. >> does anybody believe that wells fargo is a better bank than jpmorgan? >> here's the thing. when you look at the xls. >> s&p financially. >> yeah. 's one of the top five. i can't disagree more with cart owner that chafrmt think it looks horrible, it's going to break 30. earlier in the day you were thinking about selling puts in the game. wrong time -- >> i wasn't looking at selling ever. >> let's get a quick call from scott of wealth of nations. scott? >> in a situation like this, you want to risk a little to make a lot. and dan's trade does that. mike's trade certainly does that. the problem with mike's trade is -- and he mentioned how cheap or expensive implied volatility it was in google. well, in wells fargo, it's even
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more expensive. i wouldn't want to be buying an outride option because the stock has to rally 10% in two months for this thing simply to break even. like the name. i don't really like the strategy though. >> and i have to correct myself. mike was not talking about selling puts. it was another stock we were talking about. we want to define it by the risk and call. >> fair enough. let's hit the stocks versus options button one more time. do you want to buy a hundred shares of wells fargo? you're convinced by the charts. it will cost you over $3,100. mike's call purchase, on the other hand, will set you back less than $100. that's why you've got to love stocks versus options. all right. do you have a question? send us an e-mail. the address is optionsaction apz c cnbc.com. we'll answer it when we return. post trade recaps there as well. do, please, check it out.
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here's what's coming up next. now, that's a good deal. last month cole and carter made a bearish price on priceline. they saw their profits sky rocket. how did they do it? find out when options action returns.
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welcome back to "options action."
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time to show you a winning options trade. a couple week back, a super power team of cole and carter made a bearish call. it's nothing short of priceless. here's why. on "options action," there's just one way to get to where you want to go. risk less to make more. that's just what cole and carter did with their bearish bet on priceline. carter thought the booking company shares were preparing for their descent. >> in this case we actually go short. >> but shorting the stock? might as well take a trip on this. so to define his risk, mike inbought the $37.50 strike put. to make money he needs the shares to fall below the put price by more than the cost of the trait to $27 by june expiration. but $38? mike, i thought we were looking for bargains. show us how to do this for less.
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>> sell the 700s against -- >> that's the ticket. >> yeah. >> so to spend less, music then sold the june 700 put for $20 and completed his put spread. but he did something better f he booked a ticket to easy profits and here's how. between the $38 he spent buying one put and the $27 he spent selling the other, mike cut his cost to just $18. and now instead of needing priceline shares to fall below $700 he can see profits if the stock falls by more than the $18 he spent on the trade or below $732 by the june expiration. but there is a trade-off, and by selling that put, mike has capped his gains to the difference between the strike of the put that he bought and the strike of the put that he sold. and since the time of the trade, priceline shares have booked a flight down south, falling 12%. making cole and carter winners.
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now "options action" from o'hare to heathrow are watching the show, and they onto want to know one thing. what will these two frequent flyers do now? before we answer that, let's see how much money was made. if you shorted priceline at the time of the trade, you would have made a bundle. mike's spread put sold at 18 bucks. that is a return of 250%. here's what's interesting if 250% didn't interest you in the first place. there's still money left. if it can stay below 700 bucks by june's expiration. the question is will priceline stay there? >> i think this is in the money put spread. basically at this point you need to adjust the strikes, take some money off the table, take a pork of that and role down. >> okay. take a quick break. we're back with the final call after this.
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>> if you're going to buy a financial, you've got to do it through calls. >> well said, you guys. looks like our time has expired. i'm brian sullivan. for more "options action" go to optionsaction optionsaction@cnbc.com.
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